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There are two methods you can do this: mechanically or manually. Mechanically means you write a small program with criteria (indicators, price action, etc) where if met, the signals will generate an entry and/or exit. Tradestation, Esignal, and several others offer this. Manually, when a system want to test out cannot be done via mechanical method (overly complex system or indicators that cannot be based on math etc), then you manually have to walk through historical data and mark entries/exits and calculate the results yourself. |
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I prefer the
manual route of backtesting because it allows me to develop a stronger understanding of the price action that's generating the trade signals along with many other benefits especially since every trading day is not the same.
The only benefit I had when I used the mechanical route via a backtesting software was the speed of data crunching.
Thus, although the manual route can take up your entire weekend to derive results in comparison to a software that can do such much faster...
I'm able to see the impact of different types of market conditions that show their face during the manual backtesting that I was unable to see during the mechanical route.